With a forward dividend yield of 7.5%, it's no secret what attracts most investors to Altria Group (NYSE: MO). The company is a dividend darling, having increased its payout every year since 2009.
While revenue growth has been a struggle for the company in recent years, it is looking to change that with its NJOY business. This has helped the stock to a 35% gain in price since the start of the year, on top of its nice dividend payout.
With the tobacco giant recently reporting third-quarter earnings, let's take a closer look at its results and see if this is a good time to jump into the stock.
NJOY powering results
Altria's NJOY business was the driver of its Q3 results, with consumable shipments jumping 15.6% to 10.4 million units. NJOY device shipments, meanwhile, more than doubled to 1.1 million units. The company said the brand gained 2.8 points of U.S. market share in the quarter, rising to 6.2%.
The company's cigarette business, meanwhile, continues to see shipments decline, with overall shipment volumes down 8.6%. Its leading Marlboro brand saw shipments fall 7.5% in the quarter, while other premium brand shipments slipped 7.9%. Discount brand shipments plunged 28.4%. Cigar volumes fell 1.6%.
For its smokeable segment, revenue net of exercise taxes rose 1.2% to $4.7 billion. Adjusted operating income for the segment climbed 7.1% to $2.9 billion.
Revenue net of excise taxes in its oral products segment, meanwhile, rose 5.8% to $695 million. Segment shipment volumes rose 1.2% to 197.1 million units, led by a 46% jump in on! brand shipments. Adjusted operating income for the segment rose 2% to $464 million.
Overall revenue net of excise taxes rose 1.3% to $5.34 billion, which was just ahead of analyst estimates of $5.3 billion. Adjusted earnings per share (EPS) rose 7.8% to $1.38, which came in above the $1.35 that analysts were expecting.
Altria increased its dividend by 4.1% in August to an annual rate of $4.08. The company generated $5.4 billion in operating cash flow and $5.3 billion in free cash flow through the first nine months of the year. Meanwhile, it paid out $5.1 billion in dividends over the same period. The dividend is covered by free cash flow, although the coverage has gotten pretty tight.
The company also bought back 13.5 million shares in the quarter, spending $680 million in the process. It ended the quarter with net debt of $23.3 billion.
Looking ahead, Altria maintained its full-year guidance for adjusted EPS of between $5.07 to $5.15, representing growth of between 2.5% to 4%. The company said it still sees a lot of economic pressure on many consumers, as demonstrated by weak traffic trends at convenience stores.
Image source: Getty Images.
Is Altria stock a buy?
Altria is getting some solid growth from both NJOY and and its on! nicotine pouches. However, volumes for its cigarette brands remain under significant pressure. Given current trends, that volume pressure is unlikely to go away. Meanwhile, it also continues to battle illicit disposable products that are not FDA-approved.
While the company's dividend is currently safe and still increasing, its coverage ratio of that dividend with free cash flow is narrowing. It is currently just a tad over 1 times, while at the end of 2022 it was over 1.2 times. Its debt-to-EBITDA leverage is in good shape at 2.1 times at the end of last quarter, but it still does carry a fair amount of net debt.
From a valuation perspective, the company trades at a forward price-to-earnings (P/E) ratio of 10 based on the analyst consensus for 2025. That's much cheaper than its former international unit Philip Morris International(NYSE: PM), based on that metric.
MO PE Ratio (Forward 1y) data by YCharts.
While Altria is cheaper and has a higher dividend yield, I prefer Philip Morris. The company faces a lot fewer volume headwinds in international markets than Altria does in the U.S., and its Zyn nicotine pouch brand and IQOS heated tobacco brand have both been big strong growth drivers.
Altria is a solid dividend play, but I would watch its cash flow coverage ratio moving forward, as it has gotten pretty tight. Ultimately, you don't want the company to go long stretches where its cash flow is not covering the dividend. To be clear, it is covering the dividend, but that coverage ratio has shrunk.
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Geoffrey Seiler has positions in Philip Morris International. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
